Doman v Young Scholars @Glebe Pty Ltd

[2024] NSWSC 1266

Supreme Court

New South Wales

Medium Neutral Citation:	Doman v Young Scholars @Glebe Pty Ltd [2024] NSWSC 1266
Hearing dates:	30 September and 1 October 2024
Date of orders:	10 October 2024
Decision date:	10 October 2024
Jurisdiction:	Equity - Commercial List
Before:	Hammerschlag CJ in Eq
Decision:	Judgment for the plaintiffs against the defendants in a money amount to be calculated in accordance with these reasons and taking into account their recovery under the bank guarantee
Catchwords:	LEASES AND TENANCIES – Claim by Landlord for unpaid rental and outgoings and loss of bargain damages as a result of termination of the Lease for the Tenant’s breach – Cross-claim by Tenant for abatement of rent from the commencement of the Lease on the basis that the Premises were damaged by ingress of water so that the Tenant’s use of the Premises were substantially affected – Landlord’s claim for rent partially predicated on the occurrence of a market rent review – Tenant claims an adjustment under a provision in the Lease entitling it to repayment of money overpaid by mistake – HELD Landlord has not established that the market rent review occurred – HELD the Tenant failed to establish that the damage to the building adversely affected its use – HELD Tenant not able to take advantage of the adjustment provision because it never pleaded it – HELD Landlord failed to establish an entitlement to various outgoings claimed
Cases Cited:	Westpac Banking Corporation v Tanzone Pty Ltd (2000) 113 NSWLR 73
Category:	Principal judgment
Parties:	Thomas Alastair Doman (First Plaintiff/First Cross-Defendant) Elspeth Mary Doman (Second Plaintiff/Second Cross-Defendant) T A Doman & Co Pty Limited (Third Plaintiff/Third Cross-Defendant) Vimreach Pty Ltd (Fourth Plaintiff/Fourth Cross-Defendant) Margaret Campbell Doman (Fifth Plaintiff/Fifth Cross-Defendant) Young Scholars @Glebe Pty Ltd (First Defendant/Cross-Claimant) Joan Elizabeth Stone (Second Defendant) Cubbyhouse Childcare NSW Pty Ltd (Third Defendant)
Representation:	Counsel: AR Langshaw (Plaintiffs/Cross-Defendants) DA Smallbone (Defendants/Cross-Claimant) Solicitors: Horton Rhodes (Plaintiffs/Cross-Defendants) RJI Legal (Defendants/Cross-Claimant)
File Number(s):	2022/372137
Publication restriction:	Nil

JUDGMENT

Introduction

1. An overreaching landlord sues a recalcitrant tenant.

2. The plaintiffs (or Lessor) own 62 Parramatta Road, Glebe (the Premises) and leased them to the first defendant (or Lessee) by written lease signed on 31 July 2014 (the Lease) for 18 years, commencing on 8 November 2014 with two options to renew, the first for 7 years and the second for 5 years. The Premises are a three-storey building with a mezzanine level.

3. The second defendant (or Mrs Stone) and the third defendant (or Cubbyhouse) (collectively the Guarantors) guaranteed the Lessee’s obligations under the Lease. At all material times, Mrs Stone has been the sole director and secretary of the first defendant and Cubbyhouse. She has extensive experience in the childcare area. The first defendant intended to operate a childcare centre in the Premises. To do so needed extensive renovations.

4. The Lease came to an end, either by termination for breach (both sides claim they terminated for breach by the other) or by mutual abandonment (given that neither party now contends that it is on foot). The date of termination is in dispute.

5. The plaintiffs claim arrears of rent, outgoings, damages (including loss of bargain damages) and other expenses arising from termination.

6. Problems for the plaintiff are that its claim for arrears of rent presupposes that there was a rent review to market in May 2017 (which in fact there was not) and various outgoings and components of its claims have not been proved. A claim for unreimbursed land tax was, no doubt for good reason, abandoned.

7. The first defendant claims that the entirety of its rental liability was abated from the start because the Premises were so badly damaged by a leaking roof that its use of them was substantially adversely affected. But the first defendant has fallen well short of establishing that the Premises were significantly damaged (and not fixed) or that its use of them was adversely affected at all, let alone substantially. Indeed, the first defendant paid full rental for some years until it stopped paying (the evidence suggests for financial inability), during which time there is no suggestion or evidence of any assertion by the first defendant of any abatement or such damage. Moreover, the first defendant never commenced the renovations which were required to enable it to operate in accordance with the permitted uses of the Premises under the Lease. The suggestion that they were inhibited from doing so because the plaintiffs refused to repair the Premises is out of step with reality.

8. The first defendant seeks to rely on a provision in the Lease that if the Lessee pays an amount which is later found to be incorrect the difference between what it paid and what it should have paid must be credited to it by the Lessor within seven days after the Lessor receives a notice about the mistake. The problem is that the first defendant never pleaded this and has never asserted mistake. Had it done so, the plaintiffs might well have had an answer (a number of possible ones spring to mind).

9. The Guarantors originally claimed that their guarantees were discharged by the plaintiffs’ breach of the Lease. Their position was modified at hearing to one that their guarantees were discharged when the first defendant terminated the Lease for breach. They did not put that they are not liable under their guarantees in respect of any obligation of the Lessee which had accrued prior to termination. On this basis, no question of discharge arises. If the Lease was not validly terminated by the first defendant there would be no discharge and if it was, there is no post-termination liability caught by their guarantees.

10. The end result is that there will be judgment for the plaintiffs against the first defendant and the Guarantors but for a substantially lesser money sum than claimed. The precise number will need to be calculated by the parties having regard to the reasons which follow.

The Facts

The Agreement for Lease

11. On 9 July 2014, the plaintiffs and the first defendant entered into a Deed of Agreement for Lease for the Premises (the Agreement) and an instrument entitled Incentive Deed (the Deed). I interpolate, that each of the Agreement, the Deed and the Lease refer to the Lessor as the Landlord and to the Lessee as the Tenant. Except when quoting from the Agreement, Deed or Lease, I will use the terms Lessor and Lessee respectively.

12. The Agreement defined Commencement Date as the date specified in the Landlord’s Certificate as the date when the Conditions Precedent are satisfied, or such later date as parties may agree.

13. Lease was defined to mean the lease of the premises annexed to the Agreement and cl 2 provided that the grant of the Lease was conditional upon the Lessee satisfying the Conditions Precedent.

14. The Conditions Precedent related to the first defendant preparing a Development Application for works necessary to use the Premises as a childcare centre and to obtain regulator approval.

15. Under cl 3.5 of the Agreement, when the Lessor was satisfied, relevantly, that the Lessee had obtained the necessary approvals, it was to provide a written certificate (the Landlord’s Certificate) that the Conditions Precedent were satisfied.

16. Clauses 7.1, 7.3 and 7.4 of the Agreement provided:

7.1 Grant of Lease

Subject to clause 2, the Landlord will grant and the Tenant will accept the Lease of the Premises from the Commencement Date, provided that the actual commencing date of the Lease shall be 8 May 2014.

…

7.3 Completion of Lease by Landlord

The Lease will be completed by the Landlord or the Landlord’s solicitors who are authorised to insert where appropriate:

(a) the Commencement Date and termination date of the term and the option terms and any other necessary dates;

(b) any other information necessary to complete any blanks.

7.4 Lease will be binding

The Landlord and the Tenant will be bound by the covenants and conditions contained in the Lease on and from the Commencement Date

17. It will be readily observed that cl 7.1 is gobbledygook.

18. Prior to the Lease, the first defendant had applied to the City of Sydney for Development Approval to convert the Premises for use as a childcare facility. At all material times, it was contemplated by the parties that the Premises would be used by the first defendant for that purpose. Development Approval for an 86-place childcare centre was ultimately obtained on 18 November 2014.

19. The first defendant’s plans for the conversion are in evidence. They reveal that extensive work was contemplated, including by the installation of skylights and a lift over-run. Part of the roof was to be reconstructed. Some of it was to be retained. On my reading of the plans, significant work was to be done on the mezzanine level.

The Deed

20. The Deed defined:

• Commencement Date to have the same meaning as it had in the Lease;

• Lease to mean the Lease between the plaintiff and the first defendant for the Premises dated on or about the date of the Deed;

• Details as the section of this Deed (sic) headed Details (there is no such section in the Deed); and

• Incentive Amount as the amount set out in the Details.

21. Under the Deed, the Lessee had a rent-free period until 8 November 2014 (although, under the Agreement, the Lessee had to pay the Lessor a fee of $50,000 for a non-exclusive licence of the Premises to enable the Lessee to prepare plans and specifications for the work to be done).

The Lease

22. The Lease is an infelicitously drafted document.

23. The front page of the Real Property Act registrable form of the Lease states:

1. TERM: Eighteen (18) years

2. COMMENCING DATE: 8 May 2014

3. TERMINATING DATE: 7 May 2032

4. With an OPTION TO RENEW for a period of 7 years and a further period of 5 years set out in clause 27 and Item 23 of Annexure A.

5. With an OPTION TO PURCHASE set out in clause 32 of Annexure A.

6. Together with and reserving the RIGHTS set out in Annexure A.

7. Incorporates the provisions set out in ANNEXURE A hereto.

8. Incorporates the provisions set out in MEMORANDUM filed in the Department of Lands, Land and Property Information as No. N/A.

9. The RENT is set out in Item No. 8 of the Details section of Annexure A.

24. Annexure A contains terms of the Lease. It includes a section entitled “Details” consisting of series of numbered Items which are referred to in various terms. Where below I refer to an Item, it is to one of those. Where I refer to a clause, it is a reference to a clause in the Annexure.

25. The following are relevant Items:

Item 5

Term

Eighteen (18) years

Item 6

Commencement Date

8 November 2014

Item 7

Expiry Date

7 November 2032

Item 8

(clause 3)

Rent

$200,000.00 per annum (plus GST)

Item 9

Day of month on which rent Instalments are due

The first day of each month

Item 12

Market Review Dates

3^rd, 6^th, 9^th, 12^{th and} 15^th anniversary of the Commencement Date.

Item 13

(clause 7)

Fixed Increase Dates and percentage

Each anniversary of the Commencement Date   4%

Item 14

(clause 8)

Tenant’s percentage of Outgoings

100%

Item 16

(clause 12)

Permitted Use

Child care facility

Item 19

(clause 23)

Landlord’s address for service

Address: ...

                 Pulteney Street, Adelaide SA 5000

Fax:          ...

Attention: Tom Doman 

Tenant’s address for service

Address:  ...

                  Baulkham Hills NSW 2153

Fax:           ...

Attention: Joan Stone

Guarantor’s address for service (Joan Elizabeth Stone)

Address:  ...

                 Dural NSW 2158

Fax:          ...

Guarantor’s address for service (Cubbyhouse Childcare NSW Pty Ltd)

Address: Goodwin Chivas & Co.

                 ...

                 Baulkham Hills NSW 2153

Fax:          ...

Item 23

First Further Term

Term:                              Seven (7) years

Commencement Date:   8 May 2032

Termination Date:           7 May 2039

CPI Adjustment Dates

Each anniversary of the Commencement Date

Fixed Increase Dates and percentage

Each anniversary of the Commencement Date   4%

Second Further Term

Term:                             Five (5) years

Commencement Date:  8 May 2039

Termination Date:          7 May 2044

CPI Adjustment Dates

Each anniversary of the Commencement Date

Fixed Increase Dates and percentage

Each anniversary of the Commencement Date   4%

26. Rent was payable by equal monthly instalments in advance, commencing on 8 November 2014 and thereafter on the first day of each month (cl 3.1 read with cl 1.1 and Items 6 and 9). Clause 3.2 provided for rent payable in respect of a broken period.

27. Clause 9.2 provided:

9.2 Adjustment of payments

If the Tenant pays an amount which is found later to be incorrect, then even if the Landlord has given the Tenant a receipt, the Tenant agrees to pay the Landlord (or the Landlord agrees to credit the Tenant with) the difference between what the Tenant has paid and what the Tenant should have paid within seven days after either party gives the other a notice about the mistake.

28. Under cl 4, the Lessee had a rent-free period until 8 November 2014.

29. Clauses 6.1 to 6.5 provided:

6.1 New Rent

The Rent from and including the relevant Market Review Date is to be the amount decided under this clause 6.

6.2 Landlord’s assessment

The Landlord may give the Tenant a notice stating the Landlord’s assessment of the current annual market rent of the Premises on a Market Review Date at any time before the CPI Adjustment Date or Market Review Date immediately after the relevant Market Review Date.

6.3 Dispute by Tenant

If the Tenant wants to dispute the Landlord’s assessment, it must give a dispute notice to the Landlord within 30 days after the Landlord gives its notice.

6.4 No notice

If the Tenant does not give a dispute notice on time, the Rent from and including the relevant Market Review Date is the amount stated in the Landlord’s notice.

6.5 Determination of disputes over Rent review

If the Tenant gives a dispute notice on time, the Rent is decided under clause 6.6 (“Decisions by valuer”). Until then the Tenant agrees to pay, by equal monthly instalments on account of the Rent from the relevant Market Review Date, the Rent immediately before the relevant Market Review Date and 80% of the increase sought by the Landlord.

30. Clause 6.6 contained provisions facilitating a decision by a valuer.

31. Clause 7, read with Item 13, provided for a fixed rent increase of 4% on each anniversary of the Commencement Date, unless the increase was less than an increase calculated on a stated Consumer Price Index (CPI) formula, in which event that formula would apply. The CPI provisions do not apply in this case.

32. Under cl 8.1, read with Item 14, the Lessee was liable to pay 100% of the Lessor’s outgoings. Outgoings was defined in cl 1.1, relevantly, to mean:

Outgoings means all operating costs paid or payable by the Landlord for an Outgoings Year, being every cost the Landlord reasonably incurs in respect of the ownership, management, operation, maintenance, use and occupation of the Building, the Premises and the Land except for (sic) including:

(c) rates, land taxes (on the basis that the Land is the only land owned by the Landlord and is not subject to a trust), and usage and other charges imposed by any Authority;

…

(e) insurance which the Landlord reasonably considers is appropriate (including for loss of rent and outgoings);

33. Clause 20 headed “Damage to Building or Premises” provided:

20.1 Tenant’s use substantially adversely affected

If the Building is damaged so that the Tenant’s use of the Premises is substantially adversely affected, the Landlord agrees to give the Tenant a notice within a reasonable time after the damage occurs either:

(a) terminating this Lease on a date not less than two weeks after the date the Landlord gives the notice; or

(b) stating that the Landlord intends to make the Premises fit for the Tenant’s use.

20.2 Tenant may terminate

If the Landlord does not make the Premises fit for the Tenant’s use within a reasonable time after giving the notice that it intends to do so, the Tenant may give the Landlord a notice stating that the Tenant will terminate this Lease if the Landlord does not make the Premises fit within a reasonable time after the Tenant gives the notice.

20.3 Reduction of payments

The Tenant may reduce its payments under this Lease for the period from and including the date the damage occurs to and including the date this Lease is terminated or to but excluding the date the Premises are made fit for the Tenant’s use. Any reduction must be proportionate to the loss of amenity caused by the damage.

20.4 Dispute as to reduction

If the parties do not agree on the proportion within seven days after the damage occurs, then each party agrees to give the other a notice requiring the dispute to be decided under clause 20.5 (“Decision of expert”). Until that proportion is agreed or decided, the Tenant agrees to continue making payments under this Lease.

20.5 Decision of expert

The dispute as to the reduction of payments under clause 20.3 (“Reduction of payments”) must be decided by a person who:

(a) is appointed by the parties (and if they do not agree on whom to appoint within 14 days after the notice is given, then by an appropriately qualified person appointed at either party’s request by the president of the Institute of Arbitrators Australia); and

(b) must be instructed to:

(i) decide what is the appropriate reduction under clause 20.3 (“Reduction of payments”); and

(ii) give a written decision including reasons; and

(iii) give that decision within one month after receiving instructions; and

(c) acts as an expert and not as an arbitrator and, unless there is an obvious error, whose decision is final and binding; and

(d) decides who must pay that person’s Costs and in what proportion they are to be shared.

20.6 Adjustments following reduction of payments

On the first Rent Day after the proportion is agreed or decided, the Tenant agrees to pay the Landlord (or the Landlord agrees to credit the Tenant with) any difference between what the Tenant has paid under this Lease and what the Tenant should have paid for the period from and including the date the damage occurs but excluding that Rent Day.

20.7 When the Tenant may not terminate or reduce payments

The Tenant may not terminate this Lease or reduce payments under this clause 20 if:

(a) the damage is caused or contributed to by; or

(b) rights under an insurance policy in connection with the Building are prejudiced or a policy is cancelled or payment of a premium or a claim is refused by the insurer because of,

the act, negligence or default of the Tenant or of the Tenant’s Employees and Agents or of the Tenant’s Subtenants. This does not affect rights the Landlord may have in connection with the events specified in this clause 20.7.

20.8 No obligation to restore

This clause 20 does not oblige the Landlord to restore or reinstate the Premises or any other part of the Building.

34. Under cl 22.1, read with cl 1.1, the Lessee agreed to pay or reimburse the Lessor promptly for its reasonable costs (including legal costs), charges and expenses in connection with the Lessee’s default, including enforcing rights (or considering doing so). Under cl 22.3, the reasonable legal costs are those on the higher of a full indemnity or solicitor and own client basis.

35. Under cl 24, read with Item 20, the Lessee was obliged to deliver to the Lessor a bank guarantee in favour of the Lessor for an amount equal to six months of rent and outgoings (plus GST on those amounts). The first defendant put up a bank guarantee for $110,000.

36. Under cl 30, read with cl 1.1 and Item 22, Mrs Stone and Cubbyhouse, jointly and severally, and unconditionally and irrevocably, guaranteed to the plaintiffs the first defendant’s compliance with its obligations in connection with the Lease and its occupation of the Premises, including each obligation to pay money. The Guarantors also indemnified the plaintiffs against any liability or loss arising from, and any costs incurred, if the Lessee did not perform all its obligations in connection with the Lease.

Water Damage

37. In or about early 2015, there was water ingress into the Premises through the roof. There is some meteorological evidence that there was heavy rainfall on 20 and 21 April 2015. Either way, on 4 June 2015, Ms Joanna Ainge of Cubbyhouse, sent photographs of the damage to Mr Justin Lokmer (Lokmer), a property manager with the plaintiffs’ then letting agent, Oxford Commercial City South Pty Ltd (Oxford).

38. Lokmer arranged a site inspection together with Mr Nick Zoras (Zoras), the defendants’ accountant, on 12 June 2015. Lokmer says that at the inspection he formed the view that water had come through the roof and had caused damage, being primarily, but not limited to, mould growth, particularly on the mezzanine level. Lokmer took some photographs.

39. Lokmer says that a conversation between him and Zoras, to the following effect, took place:

Lokmer: This looks pretty bad, would you like us to get it sorted out?

Zoras: No, that's alright, I am just here to make a note of it. We are going to undertake an extensive renovation which will replace all damaged areas, so there would be no point.

40. Zoras swore an affidavit denying the conversation. He was cross-examined (remotely). He no longer denied it. His evidence was that he could not remember. He expressed the view that he did not believe he would have said it but did not recall. He accepted that in his view, at that time, there would have been no point in replacing the damaged areas if the first defendant had proceeded to do the childcare centre. To the extent that his evidence was a non-acceptance of Lokmer’s version, it was unconvincing. To be fair to him, however, his oral evidence was a substantial dilution of his affidavit.

41. Lokmer subsequently received no further correspondence regarding the damage to the Premises.

42. I accept Lokmer’s evidence that a conversation to the effect that he recounts took place. He was a credible witness. The conversation sits comfortably with the objective reality that it was the first defendant’s intention to redo the Premises to make them into a childcare centre and there would have been little utility in fixing the damage at the time. More importantly, it undermines the first defendant’s claim to full (or indeed any) abatement on the basis that it could not use the Premises because the plaintiffs failed to repair.

43. In January 2017, there were, it seems, storms in Sydney.

44. On 10 March 2017, after a routine inspection of the Premises, Mr Shane Blackett (Blackett), a director of Oxford, wrote to Mr Andrew Doman (who is associated with the plaintiffs) referring to having organised a plumber to inspect the box guttering “on the back of damage” caused by the storms (he also referred to an upcoming review of the rent to market). He prepared a condition report which is in evidence and refers to significant water damage. He says that the damaged areas were on the mezzanine level.

45. Blackett engaged Goodwin Brothers Pty Ltd to rectify the roofing faults at a cost of $19,690. The repairs were completed by May 2017.

46. I interpolate that there was an inspection of the Premises on 31 March 2021, which revealed no new leaks and that all existing leaks were dry. There was some water pooling at the street front entrance. It seems likely that water had come in beneath a roller door on the street frontage, although it is possible that a cracked or broken window had allowed some water ingress. Recommended maintenance was rubber for the bottom of the roller door. I am not persuaded that this presence of water was related to the previously leaky roof.

Dispute

47. By all accounts, until the beginning of 2017, the first defendant paid rent in accordance with the Lease and paid it on time. However, in February 2017, the first defendant defaulted in timeous payment of the rent and did so again in March and April.

48. On 26 April 2017, Blackett wrote to Joanna Ainge (copied to Mrs Stone and John Moufarrege) saying that rent was still unpaid and overdue for April. He wrote:

Good afternoon Joan/Joanna,

Young Scholars rent for 62 Parramatta Road Forest Lodge is still unpaid and overdue for April.

John has made several attempts to make contact to discuss with no answer.

In the past Young Scholars have always been on time and efficient in making their rent payment, however April will be the third month in a row Young Scholars will have been 1 month or more in arrears.

As you can appreciate the owners rely on these funds to make payment of various financial commitments and when there is no rent to disburse at the end of the month it creates not only problems with their own commitments but concern about the financial security of Young Scholars as tenants moving forward.

Could you please contact John or myself as soon as possible to discuss the situation.

Thank you.

SHANE BLACKETT

49. 8 May 2017 was the third anniversary of the Commencing Date on the front page of the Lease, but not the Commencement Date in Item 6 – the third anniversary of which was 8 November 2017.

50. On 26 June 2017, Blackett wrote to Mrs Stone:

Good Afternoon Joan,

I tried calling you this morning with no luck.

It has become apparent that rent is again 3 weeks over due at 62 Parramatta Road Glebe.

It is also noted that accounts are refusing to pay the market review as reflected in the signed lease.

These concerns are both in breach of your lease.

All of this with still no clear indication on when works are to commence on the fitout.

The lessors have been more than lenient over the past 6 months when it comes to overdue rent.

However, accordingly these issues need to be resolved once and for all.

If you want to debate the market review, you are able to do so with an independent valuation, but in the meantime you are required by the terms of your lease to pay 80% of the market rental until this is finalised.

Rental arrears need to be brought up to account immediately and paid on time monthly moving forward.

In addition the lessors require clarity on when fitout will commence and your intentions of opening the business. As you can understand a vacant building, particularly for over three years impacts the value and reputation of the building.

I understand you are a very business (sic) woman but these concerns need to be addressed as the lessors have reached the point where they can no longer deal with the uncertainty in your tenancy.

If you do need to look at offloading the lease, I would be more than happy to help you out.

Thank you Joan.

Kind regards,

SHANE BLACKETT

51. On 3 July 2017, Oxford gave the first defendant written notice to comply and remedy the breach within seven days (the notice is wrongly headed “Notice of Termination”).

52. On 4 July 2017, Joanna Ainge wrote to John Moufarrege of Oxford (copied to Mrs Stone and Zoras):

Hi John,

I am sorry for the delay in settling the rent and the review. It would be a great help to me in settling the overdues if you could arrange to supply me with the rental review that was commissioner (sic) by Oxford Commercial.

I can’t make a recommendation to the board regards accepting this review until I can first sight the Landlords review. It may be a situation that we will be happy to accept this increase as being fair and reasonable but until I sight the document I can’t take any further action.

On 23^rd May 2017 a payment of $24,860.22 was made in settlement of the May Rent. As previously explained I cannot authorise the payment of the increase based on your rental review, until such time as I receive a copy of the review on which the increase was based.

I have authorised the payment of the $24,860.22 this Thursday in settlement of the June rent excluding the increase. I anticipate that I will be able to settle the July rent next week.

The rental increase will be settled as soon as the review is received and I have been able to present it to the board.

Kind regards

Joanna Ainge

53. On 11 July 2017, John Moufarrege wrote to Joanna Ainge (copied to Mrs Stone, Zoras and Blackett):

Hi Joanna, Joan and Nick,

We confirm receipt of the $30,000 payment made by Young Scholars.

Please note a balance of $5068.42 is required to be COB today to finalise the arrears noted on the notice of termination. You will need to provide a remittance confirming the full amount of $5068.42 has been transferred to our account.

As you are aware your rent is due on the 8^th of each month, consequently the July instalment is now 3 days in arrears, please provide an indication of when the July Instalment will be paid.

In regards to the rent increase, please note you are required to reply to us no later the 18^th of July 2017 if you accept the rent increase or if you wish to dispute.

If we do not receive a reply by the 18^th of July 2017, it will be taken as acceptance of the rent review increase as of the 8^th of May 2017, the balance of rent due (20%) will be invoiced from the 8/5/17 to date.

Kind regards,

John Moufarrege

54. On 19 July 2017, John Moufarrege wrote to Joanna Ainge (copied to Mrs Stone, Zoras and Blackett):

Dear Joanna, Joan and Nick,

We confirm receipt of $5068.42.

Your failure to respond to the email below is taken as acceptance of the rent review, please note that the rent is now agreed and confirmed at $28,333.33 per month + GST + outgoings.

I have attached your current status report stating the balance due immediately. Again I remind you the July rent was due on the 8^th, consequently you are now 11 days in arrears. our instructions from the Lessor are firm, we will be issuing you a default/termination notice again if the rent exceeds 14 days in arrears.

Please note the total amount due as attached is $48,664.31

Kind regards,

John Moufarrege

55. On 25 July 2017, the plaintiffs gave a further notice requiring the first defendant to remedy its breach. From that time until November 2020, the first defendant paid rent.

56. In February 2019, the plaintiffs made a claim for $22,923.50 on their insurer Zurich, for “storm” damage to the Premises. The date of the incident given on the claim form was 12 June 2016 and the description of the damaged property was the first level carpet, ceiling hole and roof repairs. The cause of the damage was “Heavy rains caused roof area to leak in property therefore causing damage to internal fittings”. The claim was not paid. The evidence does not enable the Court to make any finding whether an incident occurred at or about that time, and if so, whether it caused any damage. It is possible that this harks back to the repairs carried out by Goodwin Brothers in May 2017.

57. On 18 November 2019, the first defendant’s Development Consent lapsed. The refurbishment had not commenced and never did.

58. On 8 November 2020, Zoras wrote to Blackett (copied to Mrs Stone):

Hi Shane,

I trust that my email finds you well today.

The rent for the month of November has been paid however moving forward we Are going to have issues meeting the monthly rental payment.

I have advised you of this possibility with my earlier correspondence to you.

We are trying to secure a new tenant for the owners unfortunately things at The present time are making this very difficult to do.

We believed that we had an opportunity however this has not progressed and We are waiting for confirmation that the opportunity will not be going ahead.

On this basis I would like to schedule a meeting to discuss how we deal with This matter moving forward seeing that the current arrangement is no longer Sustainable from our end.

I will give you a call on Tuesday to follow this up with a view to us locking in A time to meet and work out a mutual agreeable outcome.

Have a good afternoon.

Cheers,

Nick Zoras

59. On 1 December 2020, the first defendant defaulted and never paid rent again (or any other amount).

60. On 9 April 2021, lawyers became involved with the usual (if not inevitable) result. The then solicitors for the plaintiffs demanded payment of unpaid rentals and outgoings totalling $224,665.92.

61. On 8 May 2021, Mrs Stone sent an email to her then solicitor attaching photographs of internal storm damage to the Premises.

62. On 18 May 2021, the plaintiffs engaged different solicitors to advise them on the dispute.

63. On 23 August 2021, the then solicitors for the first defendant wrote to Blackett and the plaintiffs purporting to terminate the Lease on the grounds that the plaintiffs had refused to make good the damage to the Premises caused by flooding (I interpolate that that assertion was not true).

64. The first defendant’s solicitors set out a chronology which included a statement that Zoras had issued correspondence to Oxford on several occasions detailing the property damage and requesting rectification. If there was such correspondence, it is not in evidence. More importantly, Zoras gave evidence that he had been through his records and could not find anything. His evidence was that consequently, he did not believe he made any such request.

65. To the extent that it is necessary to make a finding, I find that this purported termination was ineffective.

66. The plaintiffs’ then solicitors responded on 6 September 2021, taking the position that the Lease had not been validly terminated and remained on foot.

67. Then, on 22 October 2021, the first defendant’s erstwhile solicitors did something of a volte face. They requested a notice from the plaintiffs under cl 20.1 terminating the Lease as the Lessee’s use of the Premises had been adversely affected by water damage. They said that “Despite our Client not proceeding with the DA, there is not an excuse for not making necessary repairs to the Premises and preventing further damage”.

68. A further request for a notice from the plaintiffs under cl 20.1 terminating the Lease was made on 3 November 2021.

69. On 12 November 2021, the plaintiffs’ then solicitors responded, rebutting the contention that the Lessee’s use of the Premises had been adversely affected and saying that any damage was repaired in May 2017 and that the balance of the damage had not been repaired because of the Lessee’s “failure to advise how it wished to use the Premises”.

70. On that date also, the plaintiffs drew down on the Bank Guarantee and received $110,000.

71. On 3 December 2021, the plaintiffs’ then solicitors issued a, perhaps inaptly named, “Final Demand” for payment of the rental arrears and outgoings. Further demands for payment were subsequently made.

72. On 15 July 2022, the plaintiffs’ solicitors gave the defendants a notice of breach of the Lease in not paying rent and outgoings.

73. On 29 September 2022, the plaintiffs’ solicitors wrote to the first defendant saying that the Lease was terminated on 16 August 2022. It is not clear why this date was selected. After 29 September 2022, the Lease was no longer on foot. I find that the plaintiffs validly terminated the Lease with effect from no later than 29 September 2020.

Lessor Relets the Premises

74. On 6 June 2023, the plaintiffs relet the Premises at an annual rent of $360,000 (plus GST).

75. There is in evidence, two tax invoices rendered by Oxford (now IB Property Group) to the plaintiffs, one dated 23 March 2023 for $2,862.98, amongst others for a signboard and photos, and a second dated 7 June 2023 for leasing commission of $62,776.36, based on 12% of the annual net rent and estimated outgoings under the new lease.

76. There is also in evidence a debtor’s ledger recording payments of costs and disbursements on numbered Bills said to have been paid to the plaintiffs’ previous solicitors. There is no bill in evidence and there is no itemisation.

Decision

77. The onus lies on the plaintiffs to prove their claim and its quantum. The amount claimed assumes a valid market rent review as of May 2017.

78. The onus lies on the first defendant to prove the abatement it asserts.

Rent Review

79. The defendants dispute that 8 May 2017 was a market rent review date because it was not the third anniversary of the Commencement Date in Item 6. On the face of the Lease, that is correct.

80. The defendants say that, as a matter of fact, no rent review took place because no notice, as required by cl 6.2, was given.

81. The plaintiffs argue that the dates in Items 6 and 7 are plainly wrong and should be read, not as 8 November 2014 and 7 November 2032, but as 8 May 2014 and 7 May 2032 respectively. They pray in aid, cl 7.1 of the Agreement and the front page of the Lease, according to which the Lease will terminate on 7 May 2032. They also pray in aid, Item 23, in which provision is made for extensions referrable to 8 May 2032 and 2039, and 7 May 2039 and 2044.

82. No written notice, as contemplated by cl 6.2, is in evidence. The plaintiffs argue that the Court should infer that such a notice was given from:

1. the contents of Blackett’s email of 26 June 2017, which refers to a refusal to pay “the market review as reflected in the signed lease” and that if the defendants wished to debate the market review they were able to do so with an independent valuation but in the meantime were required to pay 80% of the market rent until “this is finalised”;

2. Joanna Ainge’s email to John Moufarrege of 4 July 2017, which asked for the rent review that was commissioned by Oxford;

3. John Moufarrege’s email to Joanna Ainge of 11 July 2017, which stated that Lessee was to reply to them no later an 18 July 2017 “if you accept the rent increase or if you wish to dispute”;

4. John Moufarrege’s email of 19 July 2017, which referred to the rent review having been accepted and agreed; and

5. the first defendant having paid an increased rent.

83. I am not persuaded that the Lease contains any error, let alone the manifest error contended for by the plaintiffs. The rent payment obligation only kicked in from 8 November 2014 (which was after fulfilment of the Conditions Precedent). It is not illogical, irrational, or absurd for the rent review to occur on the anniversary of that date. The Details are a bespoke part of the Lease. If there is an error, it is equally open to conclude that the May dates rather than the November ones are in error. Item 23 has its own Commencement Dates. It is not reliant on the definition of Commencement Date in Item 6. All Commencement Dates are to be distinguished from the Commencing Date. The Agreement has yet a different Commencement Date. Clause 7.1 reflects the confused thinking of the draftsman; it does not support the conclusion that Items 6 and 7 are incorrect and absurd: see Westpac Banking Corporation v Tanzone Pty Ltd (2000) 113 NSWLR 73 at [20] and following.

84. In my view, 8 May 2017 was not a rent review date.

85. I am also not persuaded that notice was given under cl 6.2. Apart from the fact that no document has been produced (without any explanation), there is no material to indicate precisely when notice was given, by whom or to whom it was given, and what it said. There is also no evidence as to how it was given, so as to conform with Item 19.

86. I observe that in his email of 10 March 2017, Blackett expressed the view that the market rent was approximately $340,000 (plus outgoings and GST) and that he would provide evidence the following week to support this but would approach the market review at $380,000 (plus GST) with the offer to reduce this rent to $340,000 (plus outgoings and GST) as incentive once the Lessee began their fit out. There is no evidence of any such market review, and in his affidavit evidence, Blackett did not say that notice pursuant to cl 6.2 was given or how or when it was given. I infer that his evidence on that topic would not have assisted the plaintiffs.

87. Clause 6.3 (“Dispute by Tenant”) has a time limit. There is no way of determining when that time limit began or ended.

88. The plaintiffs accepted (correctly) that if the Court found no valid rent review as of 8 May 2017, their claim for unpaid rent could only be on the basis of CPI increases provided for in the Lease.

89. As I have said earlier, apart from seeking at the hearing to rely on cl 9.2, the first defendant did not make a claim for restitution of overpaid rent. In addition, the first defendant put that all they were claiming is whatever was overpaid pursuant to an abatement (T104.50 – T105.1). Thus, in any event and leaving aside cl 9.2, if the first defendant does not establish its abatement, the plaintiffs can retain any such overpayment.

Outgoings

Legal Fees

90. The plaintiffs claimed $82,638.44 as legal costs paid to their then solicitors.

91. The plaintiffs failed to prove either that the payments that they say they made were in connection with the first defendant’s default or, more importantly, that costs at this level (or any other level) were reasonable.

92. They provided no detail of by whom the services were rendered, for what or how the amount claimed is made up. They put the unsustainable proposition that so long as the incurring of costs in a designated category was reasonable, they could have whatever those costs were, even if the quantum was not reasonable. The proposition needs only to be stated to be rejected. Costs are not reasonable just because they are costs that have been charged or paid. Costs are not reasonable if they are not justified in amount.

93. On the Court inquiring as to whether the solicitors’ itemised bill was in evidence, Counsel for the plaintiffs put that the entirety of the bill was subject to legal professional privilege. Leaving aside the improbability of this, it may be inferred that the plaintiffs took a deliberate decision not to produce or rely on the solicitors’ bill, but nevertheless, persist in a claim for costs.

94. This claim fails.

Insurance

95. The plaintiffs’ claims included premium payments said to have been made, according to the affidavit evidence of Mr Thomas Doman, under an insurance policy “in respect of the Property” issued by Zurich (the Property Policy). I rejected the words “in respect of the Property”. Plainly, they have no probative value. But more importantly, on 12 February 2024, Ball J ordered the plaintiffs to discover copies of all documents comprising the Property Policy referred to in Mr Doman’s affidavit, including the policy terms, certificate of currency, and any like documents establishing that the Property Policy was in force, and its terms. 

96. In not producing the Property Policy documents, the plaintiffs failed to comply with the order of the Court. On the second day of the hearing, after I directed them to do so, they produced a pile of documents. The defendants justifiably objected to the plaintiffs relying on this material, especially in the face of their non-compliance, and in circumstances where the defendants would plainly have been prejudiced. The result is that the plaintiffs have not established a legitimate entitlement to any insurance premiums said to have been paid under the Property Policy.  

97. Additionally, the plaintiffs led no evidence that they reasonably considered the insurance to be appropriate as required by sub-paragraph (e) of the definition of “Outgoings” in the Lease.

98. This claim fails.

Reletting Costs

99. In connection with the new lease, the plaintiffs claimed $65,639.34 in agents’ fees to IB Property, comprising of two separate amounts, reflected in two invoices: $2,862.98, apparently for a signboard and photos (which was not challenged by the defendants), and another for $62,776.36, comprising commission, calculated at 12% of the average annual rent and estimated outgoings plus GST under the new lease. There was no evidence as to the reasonableness of a percentage commission of the order charged by IB Property. In what might be described as a show of spontaneous generosity, the defendants accepted that 5% would be reasonable. The result is that, under this head, the plaintiffs should have the first invoice and a further $26,156.82, making a total of $29,019.80. 

Other Outgoings

100. The plaintiffs claimed reimbursement of rates paid to the City of Sydney, and amounts paid to Sydney Water. These were not challenged by the defendants. The plaintiffs are entitled to these amounts as liquidated debts or damages.

Abatement

101. At the hearing, the defendants articulated the abatement claim as follows:

1. in order to use the Premises as a childcare centre, the first defendant had to carry out significant renovations;

2. the damage to the roof rendered it impossible for them to carry those renovations out;

3. they lost their development approval and then could not carry out the renovations and use the Premises as a childcare centre; and

4. hence, the damage to the building was such, so that the Lessee’s use of the Premises was substantially adversely affected.

102. Only proposition (1) is correct.

103. The proposition in (2) is factually incorrect. The damage to the roof in no way prevented, or indeed hindered, the carrying out of the renovations. Indeed, large parts of the roof would have been affected by that renovation anyway. There is sufficient evidence to find that the damage had nothing to do with the first defendant not carrying out the renovations. Zoras told Lokmer that it was not necessary to repair the damage precisely because the Premises were going to be renovated. No contemporaneous, or reasonably contemporaneous, complaint that the damage had prevented or hindered the renovations was ever made. It would not have been a bona fide claim. No reduction in rent was ever made or claimed by the first defendant. When the first defendant defaulted in payment of the rent, the explanation given by Zoras, its accountant, was that they were going to have issues meeting the monthly rental payment. Finally, the evidence establishes that the roof was fixed by May 2017 and never leaked again.

104. The proposition in (3) does not follow from the propositions in (1) and (2). They lost their development approval because of their own delay.

105. The proposition in (4) does not follow from any of the propositions that precede it.

106. I observe that, had a reduction in rent been claimed, the Lease contained a dispute resolution provision of which the plaintiffs may have availed themselves.

107. The first defendant’s claim for an abatement fails. Therefore, so does its claim for any adjustment.

Damages

108. I find that the Lease was terminated by the plaintiffs no later than 29 September 2022 for the first defendant’s breach in paying whatever amount was due for rent and outgoings from December 2020 to September 2022. 

109. The plaintiffs are entitled to loss of bargain damages for the period from termination until the entry into of the new lease. It was not suggested that the plaintiffs had not mitigated their damage. The loss of bargain damages are to be calculated on the basis that there was no market rent review as of May 2017 and on the basis that the plaintiffs have not established any entitlement to the payment of insurance premiums. 

Conclusion

110. There will be judgment for the plaintiffs against the defendants in a money amount to be calculated in accordance with these reasons and taking into account their recovery under the bank guarantee.

111. The parties are to bring in short minutes reflecting this outcome, including any amounts payable for pre-judgment interest. They are to draw to my attention any issues (other than costs) which remain to be determined.

112. I will hear the parties on costs. 

113. The exhibits are to be returned. 

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Decision last updated: 10 October 2024